Satellite Radio Playground
submits:
by Dennis "Cos" Costa
On Wednesday, August 4th 2010 at 8:00 a.m. ET, Sirius XM Radio (
SIRI
) will be
conducting a conference call
to discuss the company's second quarter 2010 financial and
operating results. Investors and analysts have been waiting for
this call with much anticipation since the company
preannounced on July 7th
that they had added over 583K net subscribers in the second
quarter. In the same press release, the company raised its guidance
for full-year 2010 to more than 1.1M subscribers, while maintaining
its guidance to achieve over $100M in free cash flow.
This news of such a large addition in subscribers was achieved
with only modest, but stable, vehicle sales being reported in the
same quarter. It also was announced after the company had already
raised subscriber guidance on May 17th
to over 750K, from 500K for the full year. It goes without saying
that all eyes will be focused on how the company was able to
achieve such dramatic numbers in a relatively flat vehicle sales
environment. It will also be of interest to hear what impact these
additional subscribers will have on important company metrics in
both the short and longer term.
While these subscriber growth numbers appear positive, the
company's stock price is hovering around $1.00 per share and it's a
"banner" for investor confusion at this price. After almost a year
of debate and concern over the company maintaining its listing on
NASDAQ, having hundreds of pages written debating the pros and cons
of a reverse split, surviving two of the company's automotive
partners washing through bankruptcy, and Sirius XM regaining entry
into the Russell indexes, the company's equity continues to
frustrate investors. It turns out that all of these regulatory,
indexing, and partner uncertainties, have had little to do with the
equity price appreciation over the past months.
The company has been executing its business plan effectively,
meeting and exceeding all of its operating and financial goals
quarter-over-quarter, and year-over-year since the merger two years
ago. In the first quarter of 2010, Sirius XM reported record pro
forma income from operations of ~$158M, positive GAAP income of
$41.6M, or $.01 cent per share. The company paid cash for bonuses
to employees, representing a change from the past practice of using
common shares as payment, which would have also resulted in
dilution of the common shareholder. In the first quarter, Sirius XM
made lump sum payments for operating expenses and programming,
eliminating fees and high interest expense which would have reduced
income in future quarters of 2010, into early 2011. They also
accounted for increased capital expense, primarily due to an
increase in satellite spending. Even with an anouncement of paying
$114M in cash, as an early repayment of 10% PIK notes due in 2011,
the company's equity still hasn't received any appreciation for the
company's efforts.
While the above performance is certainly notable, the real
performance, which many who have followed this company are waiting
to see evidence of, is growth in cash. The company needs to become
the cash-generating machine that was promised by CEO Mel Karmazin.
With all of the company's accomplishments of the last eighteen
months, the reported free cash flow in the first quarter of 2010
was a negative ($127M). While all of the explanations accounting
for the use of cash above are understandable in rationalizing this
number, it is not what will drive the company's equity to higher
levels. As evidence of this sentiment by investors, on May 3rd, the
day before the company's last conference call, the price of the
stock was $1.23 per share. By the end of the week on May 7th, the
stock was trading at $1.01 per share after reporting this negative
free cash flow number.
Going into this call, many will tout the average revenue per
share ((
ARPU
)), the subscriber acquisition costs ((
SAC
)), the churn rate, and the conversion rate for self-paying
subscribers, and that great total net additional subscriber number,
as the important key metrics to watch when they talk about Sirius
XM's performance. While these numbers are important operating
metrics, and interesting discussion on many forums, it will be the
Free Cash Flow ((
FCF
)) that is the "Show Me" number for analysts and institutional
investors when they make their decisions in the upcoming weeks and
months. For investors, a suprise to the upside in positive free
cash flow will be a welcome surprise.
Disclosure:
Long SIRI
See also
Valassis Communications, Inc. Q2 2010 Earnings
Conference Call Transcript
on seekingalpha.com